Chapter – 5C Organizational Structures
Organizational structure is the company’s formal configuration of its
intended roles, procedures, governance mechanisms, authority, and
decision-making processes.
Simple Structure
Simple organizational structure is most appropriate for companies that
follow a single-business strategy and offer a line of products in a single
geographic market. It is also appropriate for companies implementing
focused cost leadership or focused differentiation strategies.
Characteristics:
An owner-manager makes all major decisions directly and
monitors all activities.
Little specialization of tasks, few rules, and little formalization.
Unsophisticated information systems and direct involvement of
owner-manager in day-to-day operations.
Communication is frequent and direct, allowing new products to
be introduced to the market quickly.
Potential competitive advantages include a broad-based openness to
innovation, greater structural flexibility, and an ability to respond more
rapidly to environmental changes. If a company grows, it may outgrow
the simple structure due to increased information-processing
requirements and pressures on the owner-manager, requiring a
transition to a functional structure.
Functional Structure
A functional structure groups tasks and activities by business function,
such as production/operations, marketing, finance/accounting,
research and development, and management information systems.
Functional Areas: In a telecom business or similar enterprise, the desired
functional areas include:
Telecom Operations
Accounts and Finance
Marketing
Administration (including Human Resource, etc.)
Advantages:
Simple and inexpensive.
Promotes specialization of labour and encourages efficiency.
Minimizes the need for an elaborate control system and allows
rapid decision making.
Enables the company to overcome growth-related constraints of
the simple structure.
Disadvantages:
Differences in functional specialization may impede
communications and coordination.
Specialists may develop a myopic (or narrow) perspective, losing
sight of the company’s strategic vision and mission.
Divisional Structure
As a firm grows, some form of divisional structure generally becomes
necessary to motivate employees, control operations, and compete
successfully in diverse locations. The divisional structure can be
organized in one of four ways: by geographic area, by product or
service, by customer, or by process.
Advantages:
Accountability is clear: Divisional managers can be held
responsible for sales and profit levels.
Higher morale: Employees can easily see the results of their
performance.
Career development opportunities for managers.
Allows local control of local situations.
Leads to a competitive climate within an organization.
Allows new businesses and products to be added easily.
Disadvantages:
Higher cost: Requires functional specialists at different divisions
and centrally at headquarters (duplication of staff services).
Requires well-qualified managers who command higher salaries.
Requires an elaborate, headquarters-driven control system.
Conflicts between divisional managers: Certain regions, products,
or customers may receive special treatment, making it difficult to
maintain consistent company-wide practices.
Multi Divisional Structure
The Multidivisional (M-form) structure is composed of operating divisions
where each division represents a separate business.
The structure calls for:
Creating separate divisions, each representing a distinct business.
Each division housing its own functional hierarchy.
Division managers managing day-to-day operations.
A small corporate office determining long-term strategic direction
and exercising financial control.
This structure enables the firm to accurately monitor the performance of
individual businesses, simplify control problems, facilitate comparisons
between divisions, and stimulate managers of poorly performing
divisions to improve performance.
Strategic Business Unit (SBU) Structure
An SBU is a part of a large business organization that is treated
separately for strategic management purposes. It becomes imperative
as an organization increases in number, size, and diversity.
Characteristics:
A single business or collection of related businesses that offer
scope for independent planning.
Has its own set of competitors.
Each SBU is a separate business and will be distinct on the basis of
mission and objectives.
Benefits of SBUs:
1. Scientific method of grouping businesses which helps the firm in
strategic planning.
2. Establishing coordination between divisions having common
strategic interests.
3. Facilitate strategic management and control on large and diverse
organizations.
4. Determine accountability at the level of distinct business units.
5. Allows strategic planning to be done at the most relevant level
within the total enterprise.
6. Makes the task of strategic review by top executives more
objective and more effective.
7. Help to allocate corporate resources to areas with greatest
growth opportunities.
Matrix Structure
In a matrix structure, functional and project-based frameworks are
integrated, enabling vertical communication between functional
managers and teams, and horizontal communication with project
managers. Employees have two superiors, a product or project
manager and a functional manager.
Roles:
Functional managers oversee domains and report to SMEs.
Project managers handle project execution.
Advantages:
1. Resource Optimization: Efficient utilization of resources across
multiple projects.
2. Flexibility: Shutting down a project is accomplished relatively
easily because it quickly adapts to changes in project needs.
3. Enhanced Communication: Encourages collaboration and
knowledge sharing across projects and functions through many
channels of communication.
4. Clear Goals: Project objectives are clear, and project managers
focus on achieving specific objectives.
Disadvantages:
1. Complexity: Dual reporting relationships can lead to confusion
and conflict between project and functional managers.
2. High Coordination Costs: Results in higher overhead cost and
requires significant planning and communication efforts.
3. Power Struggles: Potential for conflicts over resource allocation
and priorities.
A matrix structure is often found in an organization when three
conditions exist:
1. Ideas need to be cross-fertilized across projects or products;
2. Resources are scarce; and
3. Abilities to process information and to make decisions need to be
improved.
Network Structure
The network structure is a radical design often called a "non-structure"
as it eliminates many in-house functions and extensively outsources
them. Organisations adopting this model are often referred to as
"virtual organisations".
Essential Features:
It eliminates many in-house functions and extensively outsources
them.
It comprises a set of project teams or external collaborations
connected through non-hierarchical, web-like structures.
The structure is highly effective in unstable environments where
rapid innovation and quick responses are needed.
Instead of maintaining a large permanent workforce, the
company may contract individuals or agencies for specific
projects.
Long-term contracts with suppliers and manufacturers replace
traditional in-house operations.
Merits:
1. Flexibility and Adaptability: Allows the structure to respond quickly
to rapid technological changes and shifting competition
patterns.
2. Focus on Core Competencies: The company can concentrate on
its distinctive competencies while gathering efficiencies from
specialized firms.
3. Cost Efficiency: Reduces costs associated with maintaining in-
house teams through subcontracting and outsourcing.
4. Decentralized Operations: Business functions are scattered,
reducing the need for a large central headquarters and ensuring
responsiveness in different regions.
Demerits:
1. Loss of Synergies: Contracting out functions may prevent the firm
from discovering synergies that could emerge from combining
internal activities.
2. Over-Specialization Risk: Focusing on only a few functions may
lead to choosing the wrong ones, resulting in a loss of
competitiveness.
3. Stress and Learning Challenges: The flatter structure and need for
intense personal interactions can create stress. Employees may
feel less connected to the organisation, leading to reduced
motivation.
Hourglass Structure
The hourglass organization structure consists of three layers with a
constricted middle layer. The hourglass structure has a short and narrow
middle-management level. Information technology links the top and
bottom levels, reducing many tasks performed by middle-level
managers. The shrunken middle layer coordinates diverse lower-level
activities. Traditional middle managers are specialists, while hourglass
structure managers are generalists handling cross-functional issues from
areas such as marketing, finance, or production.
Benefits:
Reduced costs.
Enhancing responsiveness by simplifying decision making.
Decision making is faster as authority is shifted close to the source
of information.
Drawbacks:
The promotion opportunities for the lower levels diminish
significantly due to the reduced size of middle management.
Continuity at the same level may bring monotony and lack of
interest, making it difficult to keep motivation high.
McKinsey 7S Model
The McKinsey 7S Model is a tool that analyzes a company’s
“organizational design.” Its goal is to depict how effectiveness can be
achieved in an organization through the interactions of seven
interdependent elements, categorized into "Hard Ss" and "Soft Ss".
These elements are interrelated, suggesting that modifying one aspect
might have a ripple effect on the others.
Hard Elements
STRATEGY: This is the direction of the organization and a blueprint
to build on a core competency and achieve competitive
advantage to drive margins and lead the industry.
STRUCTURE: Depending on resource availability and the desired
degree of centralization or decentralization, management
chooses from available organizational structures. x
SYSTEMS: This component involves the formal and informal
processes, tasks, and teams developed to execute goals and
objectives in the most efficient and effective manner.
Soft Elements
SHARED VALUES: These are the core values and ideas the
organization subscribes to that are reflected within the
organizational culture or the code of ethics.
STYLE: This depicts the LEADERSHIP STYLE and how it influences the
strategic decisions of the organization. It also revolves around
people motivation and organizational delivery of goals.
STAFF: This refers to the TALENT POOL of the organization.
SKILLS: These are the CORE COMPETENCIES or key skills of the
employees that play a vital role in defining organizational
success. Strategic investment in training programs directly
addresses the development of key skills within the workforce.
Limitations of the McKinsey 7S Model
While the model provides a structural approach to analyzing
effectiveness, it has certain limitations:
It ignores the importance of the external environment, depicting
only internal elements.
It does not clearly explain the concept of organizational
effectiveness or performance.
The model is considered to be more static and less flexible for
decision making.
It is generally criticized for missing out on the real gaps in the
conceptualization and execution of strategy.